HP taking aim on IBM with risky $13.2B acquisition of EDS

Riding a hot streak that has doubled its stock price in the past three years, Hewlett-Packard Co. is rolling the dice on a $13.2 billion acquisition of technology services provider Electronic Data Systems Corp.

The all-cash deal announced Tuesday represents HP's biggest gamble under the leadership of Mark Hurd, who was hired as chief executive in March 2005 to turn around the Palo Alto-based maker of personal computers and printers.

As Hurd relentlessly cut costs while demanding better execution from the company's remaining workers, HP recovered from a nagging financial hangover that was exacerbated by the biggest acquisition in its 69-year history — the $19 billion purchase of Compaq Computer Corp., completed in 2002 over strident shareholder objections.

Now HP will try to show it learned from its mistakes by making the second largest deal in its history pay off faster.

Investors already are worried that HP is taking an unnecessary risk on EDS, whose disappointing profit margins had caused its stock to drop by about 30 percent over the past year. HP shares sagged $2.56, or 5.5 percent, to finish Tuesday at $44.27.More>>

HP wants to buy EDS for about $12 billion

In a move aimed at reshaping the $750 billion global tech-services industry, Hewlett-Packard (HPQ) on May 12 revealed that it is attempting to buy Electronic Data Systems (EDS). If the deal is consummated, EDS, the No. 2 player in tech services, and HP, No. 5, will be combined to create a $40 billion-a-year powerhouse that's more capable of challenging market-leading IBM (IBM).

Pulling off such a combination won't be easy, though. This would be HP's largest acquisition since it bought Compaq in 2002 for $18 billion—a deal that caused HP serious indigestion and led to the fall of the deal's architect, former HP Chief Executive Carly Fiorina. EDS has more than 135,000 employees and has struggled in recent years to compete with industry leaders IBM and Accenture (ACN) and a handful of Indian challengers. "It's a big fish to swallow, but [HP CEO] Mark Hurd is a very good manager, very good at execution, so it makes sense," says Rebecca Segal, an analyst at market researcher IDC. More Details>>